Great points @sep & @papa_raw - I love this discussion already. Let me add some thoughts from a reserve perspective while I digest the points that have been made so far.
One of the things that came up in the conversation around CGP31 (adding tokenized carbon credits to the reserve) was the question of what criteria should be used in deciding assets for the reserve. This is an important question as we start to explore natural capital tokens for the reserve, and @Brynly, @MarkusBerlin, and I put together some thoughts here to start a conversation.
The Celo reserve has a clear operational objective: to back and stabilize Celo-native currencies. To hold to this objective, the reserve should be decentralized, transparent and growing, and holding a diversified basket of reserve assets.
As such, below are what we think are ideal characteristics for assets being considered for substantive reserve allocation. Note that these are intended to be ideal characteristics; some assets may have some but not all of these. And for small reserve allocations, there may be a different conversation altogether.
This is intended to be a conversation-starter; please feel free to jump in with thoughts/comments/suggestions.
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Quality: The asset should be market-tested, trustworthy and of high quality. The asset’s assessment should include technological, financial, cryptoeconomic, legal, regulatory, and/or environmental aspects, the asset’s growth prospects, as well as its alignment with Celo’s mission. The assessment should take into account the Celo community’s perception of the asset, assessments of certification and verification providers, feedback from experienced industry and market participants, as well as professional expert opinions.
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Efficiency: The reserve should be able to hold and trade the asset as easily and cost-efficiently as possible. An assessment should determine where and under which conditions the asset can be held (security, availability, custodial setup ) and traded (availability of exchanges, trading conditions). The blockchain environment should be considered (e.g. chain reliability, bridge availability, gas fees, etc.), as well as the asset type (fungible vs non-fungible, ERC20 compliant, etc.). We believe there should be a preference for Celo-native assets primarily, as well as assets on chains that are connected to Celo via efficient bridges secondarily, because they can provide for efficient and trustless on-chain reserve rebalancing.
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Transparency: Ownership and value of the asset, including any underlying asset(s) in the case of wrapped assets or asset derivatives, should be publicly verifiable. Assets should be on-chain, or if a distributed ledger is unavailable, tracked in a public and open registry. The asset’s value should be directly or indirectly available from public sources, such as DEXs, CEXs, information providers, registries, aggregators or other market sources. If public market prices are unavailable, the asset should provide for an alternative pricing mechanism that relies on publicly available information.
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Liquidity: The asset should be traded in a liquid market, on which the reserve can trade frictionless with limited market impact. Possible metrics include measures related to total and daily trading volumes, percentage floating, percentage held by reserve, order book depth (CEXs), slippage (DEXs), and spreads.
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Stability: The asset should add to the reserve’s stability. This can be achieved by introducing low-volatility assets or by adding assets that contribute to the reserve’s diversification. Metrics can include historical and expected volatility measures, estimates for the correlation with existing reserve assets, estimates on the asset’s tail risks (e.g. on the likelihood and the conditions under which the asset would come under severe distress) and other idiosyncratic risk components (e.g. whether the asset behaves differently if markets trend upward versus when markets trend downward), as well as qualitative and/or technological information on the asset’s stability and diversification aspects.
Many assets are unlikely to satisfy all criteria simultaneously. For example, real estate could add valuable diversification but could decrease overall liquidity. By applying the criteria to a particular asset, the community can weigh and discuss all these criteria and assess the expected effects on the reserve as a whole. The reserve may be “short” on one criterion and “long” on another, so adding an asset that does not tick all the boxes could still be beneficial for the reserve overall. And finally, for small allocations, we can imagine other criteria coming into play – for example, helping to develop an asset class that will be important for stability in the long term.
Looking forward to hearing your thoughts!
Brynly, Markus, Slobodan